In December 2023, world leaders are gathering in Dubai for COP28. This annual international conference aims to address the escalating climate crisis. Previous conferences have achieved policies such as the Paris Agreement. This is a binding international pact on climate changes, adopted in 2015.
In recent years, the spotlight has intensified on the role of investments in the climate debate. ‘ESG‘ stands for Environmental, Social, and Governance. This is a framework used to measure a company’s sustainability, workforce and ethical practices. Many companies have ESG ratings, which could help consumers make informed choices. It is well accepted that savings, including pensions, can help shape a sustainable future.
Sustainable investing considers ESG factors alongside financial returns. It has gained popularity, but also criticism of ‘greenwashing’. This is the practice of including companies you wouldn’t expect to find, such as an oil company, in a “green” fund. Greenwashing threatens consumer trust and undermines the integrity of the sustainable investing market.
Keep reading to find out how the FCA is tackling greenwashing. Plus, which investments can we truly call ‘green’ under these new rules.
The FCA’s measures to tackle greenwashing
In response to the growing threat of greenwashing, the UK’s Financial Conduct Authority (FCA) implemented comprehensive measures in October 2022 to combat this issue. This signalled a clear commitment to protect consumers and promote transparency.
In early 2024, the FCA plans to introduce the following measures.
- An anti-greenwashing rule for all authorised firms to make sure sustainability-related claims are fair, clear and not misleading.
- Product labels to help investors understand what their money is being used for, based on clear sustainability goals and criteria.
- Naming and marketing requirements so products cannot be described as having a positive impact on sustainability when they don’t.
These measures are designed to help consumers make informed decisions. This means businesses must be able to back up their claims with evidence. In November 2023, the FCA opened up a further consultation on one of these measures, the anti-greenwashing rule. The remaining proposals will come into effect from December 2024.
What forms a ‘green’ investment under the new rules?
To be labelled as a green investment under the FCA’s new rules, an investment must meet all of the following criteria:
- have a clear and measurable environmental or social benefit;
- be aligned with sustainable investing principles; and
- be managed by a money manager who has a strong plan for making environmentally and socially responsible investments.
One example of a green investment under the FCA’s new rules is impact investing. Impact investing aims to have a positive impact on society, or the environment, while generating financial returns. Examples include renewable energy projects and companies improving conditions in developing countries.
The impact of the FCA’s actions
Concerns over climate change have fuelled demand specifically for impact investing among pension savers. Our research found that some future retirees could be at risk of homelessness due to climate change. Retirees may need an extra £25,000 in retirement savings to pay for climate-related food costs.
The PensionBee Impact Plan
In February 2023, we launched our Impact Plan - one of the most ambitious attempts to make impact investing accessible to mainstream savers in the UK market. There are many international companies tackling global issues, while generating long-term investment returns. The Impact Plan only invests in these companies, helping you save for retirement.
Our Impact Plan was created in partnership with one of the world’s largest money managers, BlackRock. It was driven by feedback from customers in our Fossil Fuel Free Plan who expressed a strong interest in developing further exclusion criteria in July 2021.
The Impact Plan goes a step further, only investing in companies that support underserved communities and tackle unaddressed challenges. This helps improve lives and creates a better planet for us all. The impact of these companies on people and the planet can be measured, so you know they’re contributing to real change.
Increasingly, young people are choosing to balance generating positive returns with prioritising important environmental and social issues. We’ve seen this first-hand with our customer base: younger savers are more likely to be invested in one of our socially responsible plans.
How to avoid greenwashing?
Providers launching impact investing products have sometimes been accused of greenwashing by consumers. Some sustainable investments may still include tobacco and oil companies, resulting in many savers remaining sceptical of such funds that brand themselves as ‘green’. It’s essential that pension savers look under the hood to check what they’re actually investing in. If they don’t want to include oil in their investments, they’ll need to go fossil fuel free.
For pension savers who are concerned about the environmental impact of their investments, active management can provide a way to align their portfolio with their values. Active management typically involves higher fees compared to passive management, due to the research and expertise required by fund managers to make informed investment decisions. However, the potential for achieving higher returns can sometimes offset these expenses. Unfortunately, these responsible funds tend to use a lot of jargon and confusing ESG ratings.
The best way to try and understand if your pension is green is to read the investment fund’s objective, which can be found in the Key Investor Information Document (or ‘KIID’ for short). Your pension provider should be able to share this information if you’re unable to find it. The introduction of the FCA’s new rules will hopefully encourage consumer confidence and we look forward to hearing our customers’ thoughts on this in due course.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.